Gold ETFs Regain Some Luster

A volatile start to 2016 for global equity markets has sent investors looking for safe-haven alternatives and that search is benefiting gold exchange traded products. That safe-haven ebullience is not limited to physically-backed gold exchange traded funds, such as the SPDR Gold Shares GLD, though GLD has been able to cobble together modest inflows to start 2016 after losing more than $5.5 billion combined in the previous two years.

Rising gold prices are prompting investors revisit gold miners equities and the related ETFs, though funds such as the Market Vectors Gold Miners ETF GDX and the Market Vectors Junior Gold Miners ETF GDXJ remain locked in long-term bear markets.

“Increased market volatility that unseated equity markets in the opening weeks of 2016 have seen commodities stage a bit of a comeback, evidenced by the recent uptick in gold prices. In fact, gold is currently outperforming most global equity indices off the starting gate,” according to a recent Markit note.

Still, traders have remained apprehensive when it comes to gold miners ETFs. As of January 11, GDX and GDXJ had taken in any new money this year, though neither ETF experienced outflows, either. Likewise, traders have taken a tepid approach to leveraged gold miners ETFs. On Monday, however, the Direxion Daily Gold Miners Bull 3X Shares NUGT, the bullish triple-leveraged answer to GDX, added $26.2 million in new assets while the Direxion Daily Gold Miners Bear 3X Shares DUST, the leveraged bearish answer to GDX, lost $15.2 million in assets, according to Direxion data.

“Resurgence in appetite towards gold has also seen sentiment towards its miners improve. Average short interest across global gold miners, with at least $100m in market cap, has fallen sharply recently, down by 21% to 3.6% of shares outstanding since early 2015. This contrasts with the average short interest of the S&P 500 which is at the highest level seen in over three years,” notes Markit.

There is a rub with that short interest data. Short interest data is often viewed as a contrarian indicator, meaning that elevated short interest is seen as a bullish sign because the more forced covering that takes place, the more heavily shorted security rises. Translation: Dwindling short interest in gold miners could imply limited near-term upside for miners ETFs.

“While the rise in gold price is positive for the industry, some US based or operating mines will need higher price increases magnitudes to improve their prospects and offset the impact of a stronger local currency,” adds Markit.